Relative Tax Rates Research Articles

Taxes, dividend yields and returns in the UK equity market

The higher rate of taxation on dividend income relative to capital gains has been offered as an explanation for the positive relation between stock returns and dividend yields among US firms. In the UK the relative tax rates are the reverse of those in the US. Thus, UK data provides an independent test of the tax-based approach to explaining the relation between stock returns and dividend yields. We find that high yielding stocks earn positive risk adjusted returns, whereas low yielding stocks earn negative risk adjusted returns. We also detect evidence of non-linearity in the performance of zero-dividend stocks. Controlling for firm size, seasonality and market risk we find a significant positive relation between dividend yields and returns. We conclude that the evidence is inconsistent with a tax-based explanation.

Economic reform

New Zealand has become a by‐word for fundamental monetarist reforms in its economy. After a long history of state intervention with a commitment to full employment and a comprehensive welfare state, a foreign exchange crisis forced a radical reappraisal. It fell to a Labour government to initiate change but it was a shift devoid of ideology aimed at improving the quality of decision‐making at all levels of the economy by exposing the decision‐makers to the rigours of the market without undue government interference. The key elements were deregulation of the labour market; freeing of the economy from traditional restrictions; greater fiscal responsibility; and price stability. Initially regarded by many New Zealanders as wild economic theory that was bound to fail, attitudes changed as the benefits began to work through. Significantly the results were seen when the rest of the world was in deep recession, suggesting that the reforms were responsible for a fundamental change in the New Zealand economy rather than a one‐off improvement. If New Zealand is to achieve full employment and a standard of living comparable with other successful countries, improvements have to be made in areas such as relative wealth, relative tax rates and untouched aspects of social reform. But under a new voting system, the next general election is considered likely to usher in a coalition committed to reversing key aspects of the recovery programme.

The Empirical Evidence for Citizen Information and a Local Market for Public Goods

In their 1993 article in thisReview, Paul Teske, Mark Schneider, Michael Mintrom, and Samuel Best sought to establish the microfoundations for a model of a competitive market for public services between local governments in polycentric regions. An important part of their model focused on subgroups of informed citizens, especially recent movers. Theoretical analysis was supplemented by an empirical study of the factors shaping accuracy of Long Island homeowners' information about relative expenditures and tax rates of their school districts. David Lowery, W. E. Lyons and Ruth Hoogland DeHoog criticize the relevance of this empirical evidence, suggesting the atypical nature of education as a service (especially in this site) and challenging the sufficiency of the demonstrated levels of information for generating a competitive market. Teske and his colleagues reply by pointing out the general importance of education throughout American local policymaking and by defending the relevance of their measures and conclusions for their market model.

The Effect of Tax Heterogeneity on Prices and Volume around the Ex-Dividend Day: Evidence from the Milan Stock Exchange

To investigate the effect of taxation on stock price and trading volume around the ex-dividend day, we use the Italian stock market, where dividends on two classes of stock are taxed differently. We find that the weighted average of investors' tax rates is reflected in the ex-day prices and the variance of the relative tax rate across investors is reflected in the volume of trades. We also show that higher transaction costs result in higher ex-dividend day excess returns and lower abnormal volume. This finding is consistent with profit elimination activity by institutions and corporations. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Misinvoicing Imports: the Interdependence of Tax and Tariff Evasion

This article shows how tax systems can be made compliance enforcing by the requirement that taxable objects be declared consistently for different taxes. Pars pro toto we analyze an importer of inputs who can partly evade income taxes and duties by misdeclaring the same import price to both tax and customs authorities. We show that, first, revenue-maximizing authorities audit with an endogenous probability that depends positively on the extent of misdeclaration; second, the profit-maximizing importer will either over- or underinvoice, the sign of misdeclaration depending on the relative tax and tariff rates, whereas the extent of misdecla ration is determined by the detection function and the penalty; third, setting tax and tariff rates appropriately will reduce or eliminate evasion, if authorities cross-check.

Geographic Income Shifting by Multinational Corporations in Response to Tax Rate Changes

We investigate geographic income shifting by 191 U.S. multinational corporations in response to worldwide changes in tax rates during 1984-90. Between 1984 and 1986, the United Kingdom reduced corporate tax rates from a maximum of 45% to 35%, and in 1985 France reduced rates from 50% to 45%. Following these reductions in European rates, the United States reduced top corporate tax rates from 46% to 34% between 1986 and 1988. Canadian rates increased between 1984 and 1986 and then decreased through 1989. Beginning in 1988, numerous countries enacted tax cuts, apparently in response to those that occurred earlier in other countries. As discussed in section 3, differential changes in tax rates provide incentives for geographic income shifting by multinational firms. We identify two subperiods during 1984-90 in which relative tax rate changes

Rational Expectations and Bond Pricing: Modelling the Term Structure With and Without Certainty Equivalence

When I shall call the 'fundamental theorem' of bond pricing asserts that the redemption yield on an N-period bond is an average of the expected future spot one-period interest rates over the remaining life of the bond. The theorem assumes certainty-equivalent behaviour for which risk-neutrality is necessary, but sufficient only if the underlying structure is also linear. The fundamental theorem has formed the basis of analysis of the term structure of interest rates since Keynes (1936) and Hicks (1939), though it has sometimes been recognised that risk aversion might lead to a systematic discrepancy or liquidity premium between the N-period redemption yield and the average of expected future spot rates over the same period. Even where the problem of risk has been addressed, usually in an ad hoc manner, the comparison of N-period yields on competing assets has usually remained the condition by which asset market equilibrium is characterised. Intertemporal models require an assumption about expectations formation. In this paper I consider the implication of rational expectations for models of the term structure. When behaviour is certainty-equivalent Mishkin (1978; 1980) has shown that the fundamental theorem has a striking implication: the N-period yield should follow a random walk. In Section I I argue that Mishkin's result is irrelevant since the fundamental theorem is the wrong characterisation of asset market equilibrium under certainty-equivalence. I propose an alternative characterisation of asset market equilibrium and derive the behaviour of bond yields and prices under certainty equivalence and rational expectations. The random walk property does not generally result. Within this framework it is also straightforward to analyse the effect on bond prices of variations in bond coupons and the relative tax rate on income and capital gains. Elsewhere (Begg, 1982) I have argued that the analysis of certainty

Industry Migration and Growth in the South

FOR at least the last two decades the South and Southwest have been the fastest growing regions in the United States. During this period we have witnessed considerable shifts in the location of economic activity and, overall, the movement has been decidedly toward the South. Since the early sixties, when this southern migration began to accelerate, an increasing amount of public attention has been directed to this topic; so much so that it is now popularly referred to as the Sunbelt phenomenon. Numerous explanations have been advanced to account for this rapid growth in the South, but three explanations have persistently evoked an impressive level of debate. First, many have argued that a significant portion of this regional redistribution can be attributed to differentials in state and local taxing policies; in particular the state corporate income tax. These rates vary considerably across states, but even more important is the observation that there have been significant changes in the structure of corporate taxes over the last few decades. Beginning in the early 1950s the relative tax rate' for several southern states, particularly those in the East South Central and West South Central divisions, began to decline sharply. On the other hand, relative tax rates for three divisions, New England, the East North Central and the MidAtlantic, rose in the early sixties. By 1970 the relative tax rate ranged from 0.60 in the West South Central (down from 1.20 in 1950) to 1.37 in the Mid-Atlantic (up from 1.15 in 1950). Notwithstanding these stylized facts, the consensus from previous empirical work on industry location suggests that state taxes have not influenced the direction or magnitude of industry migration. However, there are reasons to believe that acceptance of this conclusion may be premature. For example, in the early body of work, results were based on simple correlations of tax levels and changes in either value added or employment.2 More recent attempts to empirically model corporate tax effects have arrived at somewhat ambiguous results. Carlton (1977), examining three 4-digit industries, found that corporate tax differentials failed to explain any of the variation in new births of firms across SMSAs. Hodge (1979), while confirming Carlton's results for the same industries, discovered that taxes have significantly affected regional investment patterns in another industry not covered in Carlton's study.3 Why taxes mattered in one industry and not in the other three remained a matter of ad hoc speculation. A second explanation alleges that states in the South have begun to exhibit a more favorable business climate. Although it is difficult to measure directly a state's business climate, one important manifestation of that climate is its position with respect to the division of power between union and management in the collective bargaining process. Legal obstacles to union organization and bargaining power will be viewed by firms as a positive signal of a pro-business environment. The creation of legislative obstaReceived for publication October 29, 1981. Revision accepted for publication April 16, 1982. Miami University. The author is especially indebted to Michael Ward at the Rand Corporation for numerouls helpful discussions throughout the preparation of this study. Also, the author benefited from the advice and comments of John Antel, Robert Cotterman. Lee Lillard, John Lunn, William J. Moore, James Smith, Finis Welch and two referees of this REVIEW. Financial suppoI-t was provided by the Foundation for Research in Economics and Education at UCLA and the University of British Columbia Humanities and Social Sciences Committee. I The relative tax is defined as a state's tax rate divided by the average for all states. As in most economic discussions, it is relative price that matters. 2 For a review of earlier work see Due (1961). Some of the studies reviewed include Bloom (1955), Campbell (1958), Floyd (1952), and Larson (1957). See also Garwood (1952). 3 Most of the other empirical work focused exclusively on intt--urban location decisions and hence had no reason to examine state corporate taxes. However, they found local tax differentials (inter-zonal) were unimportant in determining intra-urban movement. For example, see Moses and Williamson (1967) and Schmenner (1978).

Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax

Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional equal-yield equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.